Telecom services, especially mobile telephony, is clearly one of the most successful examples of India’s economic reform agenda since the early 1990s. Fourteen years ago, from a state-owned monopoly, the telecom market was thrown open to private and foreign players. With competition, the biggest beneficiary of all of this has been the customer who enormously benefited from the lowest mobile phone tariffs in the world of less than one US cent per call, besides choice of technology, GSM or CDMA. Even the state-owned enterprises BSNL and MTNL entered the fray. India now has over 846 million phone subscribers, 96 per cent of which are for mobiles.
According to the latest numbers, mobile telephony is expanding at the rate of 20 million customers a month and there are currently 23 mobiles for every landline phone. This revolution has gone beyond the big metropolises, smaller cities and towns to penetrate rural India.
One big spin-off of this boom is the possibility of innovation blowback to emerging markets like Africa. Leading players from India are closely tracking the business opportunities in penetrating the Dark Continent because its telecom market is the most underdeveloped and spread over a vast geographical area. The market has low rates of penetration with only three to four operators — unlike the highly competitive situation in India where most global giants have a presence but only a few players like Bharti Airtel remain profitable despite rock-bottom tariffs, thanks to innovations.
Bharti has outsourced network planning and IT backbone and converted its fixed costs to variable costs. This has allowed it to invest a minimum amount to set up a network that can handle a threshold level of calls and then wait for the usage to build to spend more. All of this comes in handy for this company that recently paid a handsome sum of $10.7 billion to acquire the African assets of Kuwaiti company, Zain.
The good news is that this business has acquired critical mass to persuade global equipment majors like Nokia and Motorola to locate their plants in India. Sriperumbudur in Tamil Nadu, for example, is a favoured location for such facilities. This welcome spillover from the boom in mobile telephony is the focus of a recent working paper* of Professor Sunil Mani of the Centre for Development Studies, Thiruvananthapuram. For starters, the boom in telecom services is definitely leading to greater domestic manufacture of equipment. This perfect correlation between the growth of the services sector and equipment sector is bound to become more significant in the future.
Although this growth is led by MNCs, there are a number of Indian manufactures who have sprung up like Micromax, Spice, Karbonn, Lava, lemon and Max. Of late, even Bharti is also entering the manufacturing space. “However, most of these local manufacturers are mere assemblers, with much of the components imported from especially China. But indications are that this is bound to change very soon in favour of local manufacturing”, notes Proffessor Mani. Even one of the oldest and leading telecom manufacturers in the public sector, ITI, whose product line was dominated by fixed line equipment, has contained some of its recent losses by engaging in manufacture of mobile sets since 2005-06.
Although the import dependence of such domestic manufacture has been somewhat high because it is based on components and indeed technology from abroad, the good news is that domestic value-addition has registered impressive strides. Local value-addition, although low, is also bound to show increases in the future. Over the last four years or so, an interesting fact cited in the working paper is that the growth of domestic manufacturing of telecom equipment has gone hand-in-hand with growing exports. The lion’s share of such exports are mobile handsets. India, in fact, is now a net exporter of such mobile handsets!
Although mobile telephony is a poster boy of reform, there is tremendous scope for public policy — for instance, in increasing the technological capability of local firms and the local value-added of equipment that is getting manufactured within the country. Policies are required for raising local content. The upshot of the working paper is that “the state still has an important role to play in this regard and the new telecom policy that is on the anvil must squarely address this important issue.”
Telecom Manufacturing Hub: India emerges as a key telecom equipment market
The exponential growth witnessed by the telecom sector in the past decade has led to the development of the telecom equipment manufacturing and other supporting industries. With the advent of next-generation technologies and operators looking to roll out 3G and broadband wireless access services, the demand for telecom equipment is set to increase rapidly in the future.
In an attempt to capitalise on this opportunity, the government and policymakers are focusing on developing the domestic manufacturing industry. The Telecom Regulatory Authority of India has released a consultation paper to identify the key impediments to the growth of telecom equipment manufacturing and to address these issues.
Kapil Sibal, minister for communications and IT, has also emphasized the need for all stakeholders to work towards strengthening the hardware and manufacturing segment in the telecom sector. “Telecom as a service industry alone cannot continue to contribute to the country’s GDP at the current level. It is important, therefore, to step up telecom equipment manufacturing in the country. Otherwise, operators will always have to battle high import bills. The economy can grow only when the manufacturing industry grows. The telecom industry will have to help the government draft a policy, which will spur manufacturing,” Sibal said.
Key trends
The Indian equipment manufacturing sector has come a long way in the past few years. From being an import-centric industry, it is slowly but steadily moving towards becoming a global telecom equipment manufacturing hub. In 2002-03, India produced telecom equipment worth Rs 144 billion, which increased to Rs 510 billion in 2009-10, marking a growth of 260 per cent.
Consequently, equipment imports have declined over the past few years. At end-2009-10, telecom equipment imports fell by nearly 11.6 per cent over the previous year to $8,731.45 million.
According to a recent report by research firm Gartner, India is the fourth largest telecom equipment manufacturer in the Asia-Pacific (APAC) region. The country had a 5.7 per cent share in the $180 billion revenue from telecom equipment production in the region in 2009. By 2014, this revenue is expected to increase to $277 billion, in which India would have an 8.5 per cent share. This would help the country move to the third spot (after China and South Korea) in terms of telecom equipment manufacturing in the APAC region.
One of the key reasons for this trend is the setting up of domestic manufacturing facilities by multinational companies. The market is currently dominated by multinational companies like Huawei, NSN, Alcatel-Lucent and ZTE, which have set up production facilities in the country over the past decade.
Also, with multinational companies setting up base in India, the country is not only emerging as a manufacturing hub but is also planning to increase its telecom exports each year. In 2006-07, India exported equipment worth Rs 18.98 billion, which increased by over 600 per cent to Rs 135 billion in 2009-10.
However, while the manufacturing sector is witnessing year-on-year growth, the indigenous manufacturing segment is yet to establish itself. Domestic telecom equipment manufacturing in India is mostly based on foreign technologies, which results in the benefits of sale of these products largely accruing to foreign companies. Also, in the past one year, security concerns related to equipment imports have been highlighted by the government. In this context, domestic manufacturing of communication equipment gains importance.
A major reason behind the dependence on foreign technology is the low spend on research and development (R&D). Of the 141 government-funded R&D projects approved by the Department of Science and Technology (DST) in 2009, only five were for the telecom sector. Moreover, of the Rs 16 billion investment in R&D by DST in 2009, only Rs 120 million was allotted to the telecom sector.
However, Indian mobile handset companies increased their share in the domestic market to 14 per cent in 2009-10 from 3-4 per cent in 2008-09. Domestic companies like Micromax, Lemon, MAXX, Videocon and LAVA have established themselves in the market and are competing with international handset vendors.
Government initiatives
The government is supporting the domestic equipment manufacturing industry and the growth of indigenous technology. In January 2011, Sibal announced a 100-day action plan for the telecom ministry. A fundamental part of the plan is to come up with initiatives to promote equipment manufacturing in the country.
The government has set up the Telecom Export Promotion Council (TEPC) to promote the export of telecom equipment and the Telecom Centre of Excellence (TEC) on a public-private partnership basis for promoting innovation and research in the sector. TEPC has set a number of targets to be achieved by 2014. These include a compound annual growth rate (CAGR) of 25 per cent in equipment exports, a CAGR of 18 per cent in domestic equipment production and catering to 70 per cent of the domestic equipment demand through locally manufactured products.
The sector is receiving support from government policies like 100 per cent foreign direct investment (FDI) in telecom equipment manufacturing through the automatic route and the promotion of telecom product-specific special economic zones. This has resulted in foreign players investing more than Rs 450 billion as FDI in the Indian telecom sector over the past 10 years.
The Budget 2011 has provided concessions on components and accessories associated with handset manufacturing till March 31, 2012. The new components that have been included in the ambit of concessions include parts or components for the manufacture of battery chargers, PC connectivity cables and hands-free headphones, and sub-parts for these components.
Key players
The key players in the industry are Motorola, Nokia Siemens Networks (NSN), Ericsson, ZTE, Alcatel- Lucent, Huawei and ITI.
Motorola
Motorola was the first equipment manufacturing company to enter the Indian telecom sector. It started operations in 1987. In 2008, it started a Rs 4 billion manufacturing facility in Chennai in the 300 acre Sriperumbudur high-tech SEZ. It was jointly developed by Motorola and Taiwan-based Foxconn.
Going forward, Motorola plans to make its India centre a global hub for research in wireless broadband technology. The company is looking to boost investments and increase its employee strength for these initiatives. Its Indian laboratories are already supporting long term evolution trials in China and Japan.
NSN
NSN, which started its Indian operations in 1995, has been a dominant player in the domestic sector. The company set up the Nokia SEZ in Chennai in 2005 at an initial investment of Rs 6 billion. The facility’s handset manufacturing division reached the milestone of producing 350 million handsets in April 2010. It currently exports to more than 70 countries.
In 2010, NSN became the first company to manufacture equipment for 3G mobile infrastructure at its Chennai facility.
NSN has identified India as one of its top four markets. Currently, 12,000 of NSN’s 65,000 global employees are located in India.
Ericsson
Ericsson was the first multinational company in India to start manufacturing radio base stations (RBSs), controllers and mobile switching centres. In March 2005, the company launched its first GSM RBS manufacturing facility in the Kukas industrial area in Rajasthan. Globally, it was the company’s fourth plant. Ericsson has announced an investment of Rs 2 billion in the facility. It now has an R&D centre, a manufacturing hub and a global network operating centre in India.
Currently, India is the company’s fourth largest market and accounts for 7 per cent of its revenues.
ZTE
ZTE launched its Indian operations in 2001. It provides CDMA equipment to the country’s three largest CDMA operators – Reliance Communications, Tata Teleservices Limited and Bharat Sanchar Nigam Limited (BSNL). India is currently ZTE’s second largest market after China and generates over 10 per cent of its global revenues.
ZTE has a manufacturing facility in Manesar, Haryana, and an R&D centre in Bangalore, which develops value-added services. The facility manufactures CDMA, GSM, digital subscriber line and next-generation network equipment as well as handsets.
In 2010, ZTE Corporation announced that its Indian subsidiary was planning to expand the Indian Engineering Centre in Delhi to meet the increasing demand for engineering services in India. In line with its long-term development and localisation strategy, the company has increased its employee strength in India by 1,000 after establishing the National Network Operation Center.
Alcatel-Lucent
Alcatel was the first company to manufacture digital switching equipment in the country. Lucent followed in 1988, offering mobility, optical, software, data and voice networking technologies. The two companies merged their operations in December 2006.
In July 2005, Alcatel-ITI opened a manufacturing facility for mobile base stations. The plant had an initial capacity to manufacture 2,000 base stations, which was doubled by end-2005.
Alcatel-Lucent identifies India and China as the major drivers of revenue growth. In June 2010, Ben Verwaayen, chief executive officer, Alcatel-Lucent, announced that the company was planning to shift its global service headquarters to India.
Huawei
Huawei launched its Indian operations in 1999 in Bangalore, where it established Huawei Technologies, an R&D centre, at a cost of Rs 4 billion. It is the company’s largest R&D centre outside China and employs 2,000 engineers currently. In September 2006, Huawei opened a facility in Bangalore to manufacture optical network products and wireless local area network solutions.
In October 2010, the company announced its plans to set up a Rs 22,500 million state-of-the-art telecom equipment manufacturing facility near Chennai. In December 2010, it established a new R&D facility in Bangalore and announced a strategy for partnerships in India over the next five years.
The equipment manufacturer plans to spend over $2 billion on development, augmentation and cooperation in local R&D, manufacturing, technology, employment and rural education during this five-year period. Huawei India currently has operations in 19 major cities and employs over 6,000 technical and professional staff.
ITI Limited
ITI Limited, which has been operational since 1948, continues to be the main domestic telecom equipment manufacturer in India. However, the company is struggling to compete with global vendors and has been in the red since 2003.
ITI manufactures mobile equipment for both GSM and CDMA technologies. It offers a range of telecom products and solutions covering switching, transmission, access and subscriber premises equipment. Its customers in India include the Department of Telecommunications (DoT), defence services, BSNL, Mahanagar Telephone Nigam Limited, the railways, the oil sector and other major corporations. The company has several plants which were set up between 1948 and 1983.
The way forward
According to DoT, telecom equipment worth Rs 3,500-Rs 5,000 billion will be required by 2015, which presents a major opportunity for the equipment manufacturing industry going forward. However, the segment has a long way to go and several issues need to be addressed.
Sector experts are of the view that capital infusion along with government assistance in achieving economies of scale and increased investment in R&D are the main ingredients for the growth of the manufacturing industry.
India can also follow the example of China, which has contributed towards making its domestic players like Huawei and ZTE globally competent. The Chinese government launched programmes like China 863 (the State High-Tech Development Plan) to develop and test new technologies in the country. Vendors like NSN and Ericsson were mandated to manufacture locally with a 95 per cent domestic work force. Support was provided to indigenous R&D through public funding, research grants and discounted loans from state-owned banks.
In India, there needs to be more aggressive lobbying at the government level to attract manufacturers. The government not only needs to impose more structured duties and levies but also introduce incentives such as tax concessions for investments in R&D so that equipment manufacturers relocate more R&D projects to India.
According to telecom operators, the government needs to incentivise them for using indigenously designed and manufactured products. In order to increase domestic participation, the government can also provide tax holidays and capital support to domestic manufacturers.
With efforts from both the government and the industry, India can build a conducive ecosystem to boost the equipment manufacturing sector, which can lead to the creation of an industry that will compete with the best in the world.